Analysts lift TRI targets but doubt cast on Q3 figures

Stock analysts raised their forecasts for Thomson Reuters shares following the third-quarter results announced this week, but a report in New York alleged the company was spinning the numbers.

One equities research analyst has rated TRI a Sell, seven say Hold, and three say Buy. The average rating is Hold and the consensus price target for shares traded on the Toronto Stock Exchange is C$39.19. Some analysts predict the shares will reach C$43. Morgan Stanley assumed coverage of Thomson Reuters on Wednesday and set an Equal Weight rating on the stock.

The Motley Fool said upper management had made serious efforts at reorganising the company and it was finally showing results.

“First, there’s the cost-cutting. Over 3,000 workers, mainly from the Financial and Risk division, are unfortunate victims of a necessary downsizing. Huge losses in the department have been almost balanced out by improving sales of the company’s signature Eikon desktops. Yet F&R revenue still declined by 2%. The layoffs come amid a shift away from acquisition growth, indicating that the company wants to simplify their business model,” it said. “Markets have long been impatient with TR’s constant M&A, waiting for them to settle down and focus on organic sales growth. Well, CEO James Smith is telling us that time is here.

“He understands that his company needs to earn the trust of the market while also focusing on their underlying business. The planned $1 billion share buyback and promise to keep increasing Free Cash Flow is meant to buy room for further debt financing. It’s apparent that they are setting the stage for higher profitability ratios.

“This company has been a mess for some time, even though it’s conducive to cranking out free cash flow. It seems that management is finally getting serious about cleaning up the operation by aiming to consolidate their dizzying lineup of products and concentrate on expanding margins. If successful, improved profitability along with its prodigious free cash could lead to sizeable returns for investors.”

But Crain’s New York, in a report headed “Thomson Reuters spins the numbers,” said: “Clearly this is a company with a lot of experience conveying messages. Tuesday's was that times are hard and further restructuring is necessary.

“It is time to press the accelerator and take Thomson Reuters to the next level of performance,” read a memo to employees from CEO Jim Smith, who then slipped into language sure to warm the hearts of management consultants everywhere. ‘How do we go from ‘good to great’?’ His answer: Let go 3,000 employees on top of the 2,500 who were cut earlier this year.

“But then an important part of Thomson Reuters’ message got muddled in a press release announcing the company’s third quarter earnings. In that release, the company never quite got around to saying exactly how much less money it’s making nowadays. That decline in fortunes is of course why so much blood-letting is underway.”

Instead, the company described how “operating profit,” revenues and diluted earnings per share were down, Crain’s said. But the good news was “revenue from ongoing businesses” and “adjusted EBITDA” crept up. (EBITDA refers to earnings before interest, taxes, depreciation and amortization.” Adjusted EBITDA, as defined by Thomson Reuters, excludes those business expenses as well as software depreciation and amortization.)

“The trouble with terms like ‘operating profit,’ ‘revenue from ongoing businesses,’ ‘EBITDA’ or – ahem – ‘adjusted EBITDA’ is they don’t have any particular meaning under generally accepted accounting principles,” Crain’s said. “These are numbers that Thomson Reuters management has cobbled together to make results look better.”

Companies do not have such leeway when they report net income, a term that has a specific meaning under generally accepted accounting principles. Many companies prefer to de-emphasise their bottom-line net results when they don't have such a pleasant story to tell.

“Still, net income has to be reported in Securities and Exchange Commission filings, and there you’ll find the results Thomson Reuters didn’t seem to want to talk about. (Eagle-eyed investors can also find net figures in a document supplementing the company’s earnings press release.)

“It turns out the company had $271 million of net earnings attributable to shareholders last quarter, a 39% decline from the year-earlier period. That’s pretty bleak compared to the 15% decline in ‘operating profit’ disclosed in Thomson Reuters’ earnings release, or the 4% increase in ‘adjusted EBITDA.’ Through the first nine months of the year, net earnings have dropped by 70%, while the rosier tint of ‘operating profit’ shows a 36% decline and the world of ‘adjusted EBITDA’ shows a 2% increase.

“The puzzling thing is why Thomson Reuters chose to sugarcoat its results,” Crain’s added. “After all, the company is slashing thousands of employees, so why not come out and just say how things really are?” ■

A Staff Benevolent and Welfare Fund (later renamed Reuters Centenary Fund) was established on 7 March 1951 with a transfer from the Pension Fund Reserve and a supplementary grant authorised by the board to mark the company’s centenary celebrations. Its purpose is to deal with special cases of hardship affecting staff members and pensioners and their dependents.